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Saturday, March 7, 2015

The Myth of Larger Devolution to States

Sona
Mitra

The
Union Budget 2015-16 is the first full-fledged budget placed by a government
which was elected with a large majority a mere nine months ago. The direction
of the Union budget remains fixed at fiscal consolidation with a renewed
aggression translating into massive expenditure compression and several
concessions announced around tax exemptions, particularly in the realm of
direct taxes. The total expenditure of the Union government has declined from
Rs.17,94,892 crore in 2014-15BE to Rs.17,77,477crore in 2015-16BE. In nominal
terms, the decline in expenditure comes mostly on account of the reduced Plan
expenditure of a magnitude of Rs. 1,09,723 crore. However Plan, Non-plan and overall
expenditures as percentage of GDP shows a decline, more so for Plan allocations.The
justification provided by the government for such reduction is on account of
the 14th Finance Commission (FFC) recommendations for fiscal
devolution to states. One of the major recommendations made in the FFC report
which was tabled last week, and accepted by the centre, took a leap forward in
terms of changing the nature of resource sharing between centre and states. The
FFC recommended a transfer of 42 percent of the divisible central taxes to the
states which amounted to an increase by 10 percent points from its
predecessors. The increased tax devolution is projected by the government as a
transfer of greater resources and increased autonomy to the states and has been
claimed as a strong step towards ‘cooperative federalism’. It is important to
however uncover the degree of truth associated with these large claims.

An
examination of the amount of increased devolution provides a clearer picture of
the status of overall resources being transferred to the states. Table 1 below
shows that the Total Union resources, states’ share in central taxes and
Non-plan grants as share of GDP does show an increase from 2013-14 revised
estimates. However, while the states’ share in central taxes and Non-plan
grants, as share of GDP has increased, the magnitude of overall Union resources
transferred to states as percentage of GDP by the 2014-15 budgeted expenditure
reveals a decline in 2015-16BE.

Table 1: Composition of Transfer of Resources to States as Share of GDP (in %)

These
increases imply that while the states would definitely enjoy a greater degree
of autonomy and flexibility in terms of deciding on their expenditure
priorities, it does not necessarily imply an increased spending capacity for
the states. Thus the Union government’s argument for reducing Plan assistance
to states due to an increased transfer of resources to the states remains
unqualified and cannot be an alibi to cut down on important expenditure
commitments, specifically those on social sectors. The reduced Plan expenditures
by the centre in fact reveal the lack of priority accorded to the social sector
commitments of the Union government.

The
government has divided some of the important schemes and programmes into three
distinct categories. It is important to interpret these categories as a lot of
it could be misleading in the way they have been announced by the Union budget.
The
Union budget 2015-16 categorically states that due to the higher devolution of
taxes to the states, the Normal Central Assistance, Special Plan Assistance,
Special Central Assistance and Additional Central Assistance for other purposes
are subsumed in the Finance Commission award itself. The Centre has thus
decided to discontinue eight schemes which include important programmes related
to the capacity building of the local bodies such as the Rajiv Gandhi Panchayat Sashaktikaran Abhiyaan and Backward
Regions Grant Funds. The list is provided in table 2a.

Table 2a: Schemes to be Discontinued by the Centre

Sl. No.

Name of Scheme

1

National e-Governance
Plan

2

Backward Regions Grant
Funds

3

Modernization of
Police Forces

4

Rajiv Gandhi Panchayat
Sashaktikaran Abhiyaan (RGPSA)

5

Scheme for Central
Assistance to the States for developing export infrastructure

6

Scheme for setting up
of 6000 Model Schools

7

National Mission on
Food Processing

8

Tourist Infrastructure

Source: Compiled by CBGA from Union
Budget documents, 2015-16

As a second category, the government has announced 31 schemes that
would continue to be fully supported by the government (Table 2b). It needs to
be clarified that full support does not imply 100 percent Union government
support. Given the way they have been reported in the budget documents, it
could be interpreted as schemes where the sharing pattern continues to remain
same as in the previous years. These comprise of the schemes which represent
national priorities especially those targeted at poverty alleviation, schemes
mandated by legal obligations and those backed by Cess collection like the SSA
and the MDM.The fourth criteria for this category relate to schemes which are
targeted to benefit the socially disadvantaged group which includes SCs, STs,
Muslims and physically challenged sections of the population. However, this
list of 31 schemes does not include important programmes related to children
and women, such as the ICDS or the National Health Mission or schemes related
to the protection and prevention of violence against women.

Table 2b:
Schemes that Continue to be Fully Supported by Union Government

(Where the
sharing pattern continue to remain as in the previous years)

Sl. No.

Name of Scheme

1

Mahatma Gandhi
National Rural Employment Guarantee Scheme (MGNREGA)

2

Multi Sectoral
Development Programme for Minorities (MSDP)

3

Pre-Matric Scholarship
for children of those engaged in unclean occupation

4

Scholarship schemes
(Post and Pre Matric) for SC, ST and OBCs

5

Support for Machinery
for implementation of Protection of Civil Rights Act, 1955 and Prevention of
Atrocities Act 1989

Finally as a third category, the government has
listed certain Centrally Sponsored Schemes to be implemented with a changed
pattern of sharing of resources, with States to contribute higher share,
details of which will be worked out by administration ministries. The number of
such schemes is 24 and the list is provided in Table 2c. However, there remains
a corollary to the explanation for the modified sharing patterns provided in
the budget documents. It has been categorically added by the centre that:

The Centre-State funding pattern is being modified in view
of the larger devolution of tax
resources to States as per the recommendations of 14th Finance Commission
whereby in this scheme, the revenue expenditure is to be borne by the States.

This announcement
implies that expenses on the capital account for the programmes at the state
level would be borne by the Union government. Given the fact that capital
expenditure by the states on most of these listed programmes are miniscule and
they have a much larger revenue component it would then safely translate as
states bearing greater shares of the expenditures. So a modified sharing
pattern essentially marks an increase in the share of states for most of the
schemes. Further it may be interpreted as a slow phase out of the schemes from
the ambit of the Union government in coming years.

Table 2c: Schemes with Changed Pattern of
Sharing Between Centre and States

It is therefore amply clear that the states, under the changed fiscal
arrangements, are ‘expected’ to play a
larger role in supporting social sector expenditures. It thus implies that
resources of the states need to increase commensurately, else all these important
programmes would eventually wither away. Moreover, with reduced plan
assistance to states and formula driven plan assistance being nil, the states
would thus have no option but to have a zero plan revenue deficit and thus might not be able to spend as per their
needs even after getting higher untied funds from Centre.

Therefore while the union government would
successfully absolve itself from any kind of social sector commitments, as and
when it transfers the 24 schemes listed in Table 2c to the states, it could be
a valid apprehension that whether the states would be willing and prepared to
take up such huge responsibilities in immediate future. This is not to question
the step towards fiscal federalism, which is undoubtedly welcome, but to raise an
apprehension based on the figures for social sector expenditures made by the
states in the last fifteen years (Chart 1).

Chart 1 clearly shows that average social
sector expenditures by all states in the last fifteen years have been 36
percent approximately[1].
Therefore, in order to realise the Centre’s expectations that the states would
shoulder major responsibilities of provisioning for the social sectors, would
only be possible under massive reprioritization of spending patterns in the
states as well as flow of adequate resources to fund these expenditure
priorities.

Chart
1: Social Sector Expenditure as Share of Total expenditures by States*

(2001-02
to 2013-14BE)

Notes:* Includes expenditure on social services, rural development and
food storage and warehousing under revenue expenditure, capital outlay and
loans and advances by the State Governments.

Source: Compiled by CBGA from State Finances: A Study of Budgets, 2013-14,
RBI, Mumbai.

It also raises apprehensions about whether
all states, specifically the poorer ones, are enough prepared to undergo the
reprioritization and planning processes with an immediate effect. It is not to
question the capacities of the states to undergo this exercise, but to raise
apprehensions for the duration of the gestation period. It is of course a known
fact that longer gestation periods would imply delays in planning,
implementation and distortion in fund flow mechanisms, not to mention further
deteriorated social conditions for the poor and marginalized. And in doing so
it needs to be ensured that the states do not face any resource
constraint.

Hence, it follows
from the above discussion that the step towards ‘cooperative federalism’, with
increased autonomy and flexibility in spending abilities for the states would
yield improved outcomes based on a singular question of whether the overall
size of the pie improves for the better. This could be examined only in the
subsequent years, as soon as greater details of overall tax revenue collections
as well as state level expenditure estimates begin appearing in the public
domain.

Notes

[1]It is obviously acknowledged that there
have been changes in patterns of fund transfers from centre to states,
following the recommendations of the different Finance Commissions,
specifically from the 10th FC onwards, which has had its impact on
the expenditure pattern of the states. In this analysis a broad social sector
expenditure trends for all states have been depicted, taking into account all
the necessary changes.

[The author works with the
Centre for Budget and Governance Accountability. Views are strictly personal.]

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